Mumbai: DE Shaw and Co., a global investment and technology development firm, will try and replicate its US strategy of the 1990s to emerge as a differentiated financial services company in India, through its joint venture with Reliance Industries Ltd (RIL).
The game plan is to devise innovative products and distribution methods using technology and use RIL’s wireless broadband business as a platform to disseminate the same. DE Shaw signed an accord with RIL, India’s most valuable company, in March to set up a financial services company.
“As things move more and more online, making sense of the data out there is something we do as a part of our investment process. We were successful doing that in the 1990s and here we don’t see our competitors doing that,” said Louis Salkind, managing director of DE Shaw and an executive committee member.
Salkind, who is visiting Mumbai, said while the joint venture—to be named DE Shaw India Financial Services Pvt. Ltd—will offer traditional financial products and services, its approach will be “next generation” in the way it uses technology.
DE Shaw India will initially offer institutional broking and asset management services starting with a private equity fund raised from domestic institutions and high networth individuals. It will gradually expand its investments into infrastructure and real estate. Both these are expected to be started towards the end of 2011.
The venture will utilize DE Shaw’s resource pool of 725 people in India to develop and market these products, apart from some new hires.
Salkind didn’t disclose any investment figures or the size of the planned fund, citing regulatory obligations, but said the investments will be comparable with those at other international investment banks.
RIL has been looking at new businesses such as telecom and financial services to efficiently deploy significant surplus cash on its balance sheet. The oil-to-yarn and retail conglomerate is expected to have cash and cash equivalents to the tune of $22 billion (Rs 99660 crore) by fiscal 2012.
The domestic fund planned by DE Shaw and RIL could need as much as $400-500 million if it invested in infrastructure alone, a vertical the two are bullish on, said Vikram Uttamsingh, executive director and head of private equity at consulting firm, KPMG India Pvt. Ltd.
“Raising money from the domestic market should not be a problem given that Reliance is their partner,” says Uttamsingh. “The platform the joint venture is trying to develop makes sense because that way they can provide equity, debt, promoter financing, and bridge loans.”
Offering an example of DE Shaw’s technical prowess, Salkind—the first person to be hired by the founder David E. Shaw, a former teacher of computer science at Columbia University in the US—referred to Farsight Financial Services.
“We developed a company called Farsight Financial Services, which was the first company to integrate brokerage and banking and offer those services over the Internet,” Salkind said. “We sold that technology and it became the base of Merrill Lynch’s online financial system.”
While capacity building to service institutional businesses will be the initial focus at the joint venture where RIL and DE Shaw are equal partners, the company aims to cater to retail clients as well.
Anil Chawla, chief executive officer of DE Shaw’s existing India arm, DE Shaw India Advisory Services Pvt. Ltd, said efficient distribution holds the key while reaching out to retail clients and the joint venture would look to do so by utilizing RIL’s fourth-generation (4G) technology.
RIL chairman Mukesh Ambani made an entry into telecommunications last year with a Rs 4,800 crore acquisition of Infotel Broadband Services Ltd, the only company to win a national licence for high-speed wireless spectrum in a government auction.
“It is something both parties are looking at, and over the next couple of years we are going to discuss how we can team up,” Salkind said.
A financial services expert from an international audit and consulting firm said that the way business was done in India was changing and it didn’t have the required interface. He did not want to be identified as he is not authorized to speak on specific transactions.
“RIL has the necessary touch points and the brand name, but that alone isn’t sufficient,” the expert said. “This is where the partnership with DE Shaw will help. The joint venture has a lot of synergies as the businesses they are looking at are all interlinked and need technology.”
This expert said that being a part of a robust financial services company will aid RIL’s inorganic expansion plans as well.
Asked why RIL’s name did not find mention in the newly created brand name for the joint venture, Salkind said it was to reflect that DE Shaw was in charge of running the daily operations of the new venture and was bringing its expertise in financial services to the table.
The board of the company, however, consists of three directors each from DE Shaw and RIL.
Apart from Salkind and Chawla, Julius Gaudio, another executive committee member and managing director at DE Shaw, will join the board.
RIL has nominated Alok Agarwal, its chief financial officer; Muralidhara Kadaba, a former president and chief executive of financial services at Reliance Retail Ltd; and Kandasamy Sethuraman, responsible for compliance and secretarial functions at RIL, on the board.
Salkind said Ambani will be “active” in framing the new firm’s strategy along with himself. He recounted how Ambani joined DE Shaw’s India advisory board four years back and keenly observed how the company with $20 billion in investment capital went about its business.
The two executives engaged in discussions over the way the Indian market was headed, and it turned out they shared a “similar vision”.
The “brainstorming” over what DE Shaw and RIL could do together started around a year back and Salkind termed the days to come as a “fun journey”.